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What Do You Get When You Cross … ?

There’s an entire genre of corny jokes of the form “What do you get when you cross an X with a Y?” Like:

Q. What do you get when you cross a refrigerator with a stereo?
A. Cool music.

Q. What do you get when you cross a centipede with a parrot?A. A walkie-talkie.

Or my favorite:

Q. What do you get when you cross an enterprise with a consumer?A. A small business.

OK, that last one isn’t funny, not even a little bit. But it does explain why I want to build a business that serves small businesses.

Small businesses judge suppliers on many of the same terms as big businesses. All businesses want vendors that provide them with
high quality at low cost. All businesses value suppliers who are likely to continue to be in business for the long haul.

Like large businesses, small businesses value function more than form. Consumers may buy MacBooks in part as fashion statements; a small business will outfit its employees with Dells if it feels they provide equivalent functionality at lower cost. The same woman who drives to work in a sporty BMW with a premium sound system will purchase a boxy white van for her business if that’s all she needs to make deliveries. Boarding your employees to the Hampton Inn is entirely reasonable even if you stay at the Ritz-Carlton when you’re on vacation.

But, small businesses value convenience as much as consumers do. For small business owners, money is in short supply, but the most precious commodity of all is time. Large businesses care a lot about legal terms; small businesses don’t particularly care whether lawsuits need to be filed in Delaware or in Oregon; the important thing is that they don’t spend time negotiating a legal agreement. Large businesses have procurement organizations that can spend several weeks negotiating a 2% discount for payment in 45 days instead of 60; small businesses are happy to provide a credit card to facilitate monthly billings. Large businesses want configuration options that allow them to customize on-premises software to conform to their policies; small businesses are entirely happy to have a cloud-based solution that has no configurability at all, provided that setting it up takes no longer than 30 minutes.

Unlike large businesses, individual small business will not spend a lot of money. Most small businesses have never written a six-digit check. In contrast, if you’re an enterprise salesperson quoting a large business less than $100,000 — ever, for anything — you should probably consider a new profession.

Small businesses hate the usual enterprise meeting-proposal-negotiation cycle; they want to get the information they need (including pricing) by looking at a web site. So, if you’re targeting small businesses you need to have an efficient sales process; you need to be able to close many individual, small deals without spending a lot of money to close each deal. In short, marketing and selling to small business can be quite similar to targeting consumers.

Let’s assume that I’ve convinced you that small businesses are something of a cross between large enterprises and individual consumers. I still haven’t explained why I’m attracted to that particular market segment.

First, there are a lot of small businesses to serve! According to the Small Business Administration, small businesses constitute a majority of the U.S. business sector, whether you measure total numbers of businesses (there are 23 million small businesses), number of employees (55% of U.S. workers work for small businesses), or revenue (small businesses account for 54% of business revenue). The large number of businesses, and the fact that the sales process for small business tends to be relatively simple, makes it possible to scale a start-up quickly.

Second, I think there’s an opportunity to deliver a lot of value to small businesses by providing simpler versions of the tools that large businesses already use. I think that there are opportunities in the areas of accounting, human resources, supply-chain management, marketing, sales, engineering, data analytics, and other business functions. And, there are opportunities for particular types of small businesses; one can imagine turnkey solutions for the providers of music lessons, for the operators of dry cleaners, or for software consultants. I’ve created, grown, and sold a small business and I’ve been a senior executive in a large business, so I have a reasonably clear picture of both the needs of small businesses and the infrastructure of large businesses.

Square is a great example of a business that is succeeding by catering to the needs of small business. The Square mobile payment product is a fantastic solution for businesses that were previously not accepting credit cards; after signing up on Square’s web-site and attaching a dongle to an iPhone, any business can take plastic. The sign-up process is simple, the software is easy to use, the pricing is transparent. As a result, Square is reputedly commanding a $5B valuation. The fact that Square charges a relatively steep 2.75% transaction fee doesn’t bother small businesses because the service is so easy to set up and use. There are other opportunities out there of similar scale.

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3 thoughts on “What Do You Get When You Cross … ?”

I’ll dispute “relatively steep … doesn’t bother small businesses”. Small businesses feel their margins as tightly as large businesses do, and the business owner is more likely to be standing there at the register watching the extra 1% slip out of their hands. I recently visited a store that was having trouble with its normal payment processing terminal and fell back to Square in order to keep making sales; I could see the clerk wince when I asked about the Square dongle.

OK, fair enough. Any generalization over as wide a group as “small business” is bound to be falsified in many cases, and you’re absolutely right that a lot of small businesses are running with very thin margins. But Square is succeeding in part because you get to avoid other costs, like the capital cost of setting up a traditional point-of-sale system, which are often packaged with training and installation services. And because the transaction costs aren’t wildly above those of other small-business payment processors, like PayPal or Intuit. I don’t mean to minimize the impact of cost, but I stand by my claim that convenience is the most important factor; I doubt that in your example, the guy who owns the business would be willing to invest more than, say, 100 hours to reduce his transaction costs by even 1%, whereas for a large business investing thousands of hours to achieve that would of course be a no-brainer.

There are several small businesses in my small town of Fairhope, AL that wince when they have to use the “normal” credit/debit payment processing system. At least three that I know of won’t take debit/credit unless it is above a certain amount (and at least one has colorful signs stating so 🙂 ). So assuming that the traditional payment fees and Square fees are reasonably close, then I could see ease of use being a win here as well.